How Should You Extract Profits from Your Limited Company?
If you run your own limited company, one of the most valuable questions your accountant can help you answer is: what is the most tax-efficient way to get money out of it? The honest answer is – it depends. And right now, it depends more than it ever has.
For some time now, the answer to this question followed a predictable pattern. A modest salary for work delivered plus dividends as a return on your investment. It was a reliable approach that worked for most director-shareholders, and many accountants applied it almost automatically.
That era is over.
The tax landscape for limited company directors has changed significantly in recent years. In our view, profit extraction is now more complex, and less one-size-fits-all, than at probably any point in the last 20 years. If your approach has not been reviewed recently – or if it has never really been tailored to your specific circumstances – there is a real chance you are paying more tax than you need to.
Why the Old Formula No Longer Holds
The biggest drivers of this shift are the increased rate of tax on dividends and changes to Employment Allowance thresholds. Dividends were once taxed at meaningfully lower rates than salary income, making the salary-plus-dividends model highly attractive for most directors. As dividend tax rates have risen, that gap has been significantly narrowed. Dividends are still a valuable option – but they are no longer the go-to answer they once were.Alongside this, the Employment Allowance has increased but with the employer secondary threshold for National Insurance dropping.
The result is that the gap between a well-planned extraction strategy and a default one has widened considerably. Getting this right now requires a proper look at your individual circumstances – not a copy-and-paste from last year, and certainly not a formula designed for a different tax environment.
So, what does “your individual circumstances” actually mean? Here are some of the key variables that shape the right answer for you.
Your Company’s Rate of Corporation Tax
This is more complicated than it used to be. Corporation tax no longer operates at a single flat rate for all companies – banding thresholds have been reintroduced, meaning that the rate your company pays depends on the level of its profits. Companies with profits between the lower and upper thresholds fall into a marginal zone where the effective rate on those profits is higher than either the small profits rate or the main rate. This matters for extraction planning because salary payments are deductible against corporation tax – so the forecast rate your company is paying on its marginal profits directly affects how attractive it is to take additional salary versus dividends. A company sitting in that marginal band is in a very different position to one clearly above or below it.
Whether Employment Allowance is Available – and How Much of it Remains
The Employment Allowance can reduce a company’s National Insurance liability, but there are two separate questions to consider. The first is whether your company qualifies at all – not every company does. The second, often overlooked, is how much of the allowance is leftavailable for the director’s salary after the rest of the payroll has been run. If the company has other employees whose National Insurance already uses up some or all of the allowance, the benefit available to offset against a director’s salary is reduced accordingly or may be gone entirely. Both questions need answering before the right salary level can be determined.
One Director-Shareholder or Several?
A company owned and run by a single director-shareholder operates very differently to one with two or more. Where multiple shareholders are involved, there may be more flexibility in how profits are allocated – but there are also more tax positions to consider simultaneously. The right approach for each individual, and for the company overall, needs to be looked at together.
Your Other Sources of Income
Your limited company income does not exist in a vacuum. If you have rental income, income from other employments, investment income, or a pension in payment, all of these affect how much of your personal allowances and rate bands remain available. Extracting profits without accounting for your full income picture can push you into a higher tax bracket unnecessarily.
Are You Looking to Extract All Available Reserves?
Some directors want to draw down as much as possible each year; others are content to leave profits in the company and extract them gradually over time. These are fundamentally different planning objectives and lead to different strategies. There is no universally “correct” answer – it depends on your personal cash flow needs, your appetite for future tax changes, and your longer-term plans for the business.
What Reserves are Actually Available for Dividends?
Dividends can only legally be paid from cumulative retained profits. It is important to establish what distributable reserves exist before planning extractions – drawing more than the available reserves is not just poor planning, it is unlawful. Your up-to-date accounts are therefore an essential starting point for any extraction strategy.
Does the Company Need to Retain Funds?
Sometimes the most tax-efficient extraction on paper is not the right move in practice. If the company has upcoming capital expenditure, growth plans, or needs to maintain a cash buffer, retaining reserves may be more important than maximising personal drawings in the short term. Good tax planning always takes the health of the business into account alongside your personal tax position.
Other Tax-Efficient Options Beyond Salary and Dividends
Salary and dividends are the most well-known tools, but they are not the only ones. Pension contributions made by the company, for example, can be a highly tax-efficient way to extract value – they are typically deductible against corporation tax and do not attract the same personal tax charges as dividends or salary. With dividend tax rates now higher than they once were, exploring these alternatives has become more worthwhile than ever. Depending on your circumstances, there may be other routes worth considering too.
As you can see, there is no single formula – and the stakes of getting it wrong are higher than they used to be. The optimal strategy sits at the intersection of all of the above, and it changes as your circumstances change. What worked a few years ago may well cost you money today.
How Composure Approaches This
At Composure, we have developed a structured compensation strategy review that looks at every relevant dimension of your situation – not just salary and dividends, but the full picture: your company’s share structure, profit projections, corporation tax position, the personal financial circumstances of each director-shareholder, and the tax thresholds and reliefs that may be in play for each of them.
We look at what you can extract, what it makes sense to extract, and what other tax-efficient options might be available to you that you have not yet considered. The output is a clear, personalised strategy for the year ahead – not a generic recommendation, but one built around your numbers and your goals.
This review is something we offer to all our retained clients as part of an ongoing servicebecause your circumstances change, the tax rules change, and your strategy needs to keep pace with both. But we also offer it as a standalone one-off engagement, so if you are not currently a Composure client, you can still access the same structured analysis.
Compensation Strategy Review
A thorough, structured review of how you extract value from your company – covering your full business and personal financial picture, with a clear recommended strategy for the year ahead. Available to clients as part of our ongoing service, and as a standalone one-off engagement.
Ready to Find Out What’s Right for You?
Book a consultation with the Composure team. We will review your situation in detail and give you a clear, personalised strategy.
